Frank Billand is a Member of the Management Board at Union Investment Real Estate GmbH.
Jürgen Müller / Union Investment

Equation with one unknown

Frank Billand on the distinctive features of the current property cycle and their consequences

Experienced property investors know that trends for commercial real estate markets are cyclical and that every upswing phase is followed by a downswing period. Those trends generally parallel the economic developments in each economic area, which in turn are influenced by the world economy. Second, we have learned that the property market responds to changes later than other sectors do. Users of office and retail space must experience a recovery before property owners and project developers will profit. Third, the received wisdom is that a cycle normally lasts seven to eight years, with the recovery and bottoming-out phases both being four years long. But are the national economies really operating normally at present? And in this age of globalisation, didn’t cyclical fluctuations on the national property markets converge a long time ago? Particularly since they are increasingly intermeshed with the global capital markets? Could it be that in the foreseeable future we will be dealing only with one property market that moves in lockstep all over the world?

A hypothesis with consequences

If so, that would have major consequences for globally active investors – and particularly their diversification strategies. They are based on the understanding that markets move differently: one might be headed for a peak and offer good selling opportunities, while another will have just bottomed out, leading to attractive opportunities for entry. Experience over the past few years has given a boost to the hypothesis of converging cycles. The impression is that the global property markets – following the subprime crisis in the United. States and the upheaval on the financial and capital markets largely caused by it – slipped into recession almost concurrently. On our own continent, the euro crisis that began in 2010 further weakened the property market in the common currency area – and the consequences there, too, were primarily, but certainly not exclusively, limited to a few markets, particularly in southern Europe. The recovery that has been taking shape since about 2014 is also proceeding in parallel on many markets, and the perception seems to be that any differences are minor. The reasons are obvious – and they also describe the distinctive features of the current property market cycle. The recovery is driven by the different more-or-less efficient assistance programmes used by countries in the euro zone, as well as the by the United States and the United Kingdom, to support their national economies. Then there are the very low interest rates – more significant because of their historical uniqueness – decreed by the powerful central banks of the industrialised countries over the past few years. We all know how much pressure the low-interest environment, which has lasted for many years now, has put on global institutional investors and that a good portion of the current boom on the property investment markets is due to the lack of alternative investments offering a similar yield-risk profile.

The answer to the question of whether the current cycle differs from past cycles therefore primarily depends on future interest rate trends. And initial differences – although still modest – among interest rates in the United States, the United Kingdom, and the euro zone are starting to take shape. Different opportunities could result from this. We observe that the markets were affected quite differently by the crisis and that they are currently still in very different stages of recovery, even if they are able to converge over the next 18 months. And even if the low-interest environment should continue, cyclical fluctuations in price levels and thus in initial yields will still be very likely. Skilfully taking strategic advantage of these cyclical fluctuations therefore remains one of the most important tasks of professional real estate investors.


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